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One day after reporting excellent financial results for the June quarter, and for the first half of its fiscal year, KKR & Co. LP announced on Friday that it has signed definitive agreements with Preferred Sands under which KKR, in conjunction with Jefferies LLC, will provide Preferred Sands a comprehensive financing solution to refinance the company’s entire capital structure.
Headquartered in Radnor, Pennsylvania, Preferred Sands is a leading supplier of “frac sand” for fracking and other energy industry drilling technologies from facilities in Canada and the US, and is one of the largest suppliers in North America. Preferred’s specialized sands are used to stimulate and maintain the flow of hydrocarbons in vertically and horizontally drilled oil and natural gas wells.
In June 2013, Preferred Sands opened a new Houston location, where the company continues to develop and grow innovative technology solutions, including an environmentally-sensitive line of resin-coated “frac sands” for both high and low temperature wells.
With increased levels of natural gas and oil production in the United States, fewer wells are being drilled, and pricing levels for drilling sand for natural gas drilling have been squeezed. This then stressed the Preferred Sands balance sheet significantly, resulting in covenant problems and leading to this KKR rescue.
Under the agreements, KKR is providing a comprehensive capital solution including debt and equity of more than US$680 million. KKR is making a significant investment mainly through its global Special Situations fund, and KKR Capital Markets, and an affiliate of Jefferies LLC jointly underwrote a new first lien credit facility.
Harlan Cherniak, a member of KKR’s Special Situations team, said: “We believe Preferred Sands has an enviable position in the marketplace, and this is an investment in the team, the technology, and the future of a growing platform. We are pleased to partner with management and provide them with a long-term, flexible capital structure which will allow them to meet the needs of their customers.”
Over the last seven years, Preferred Sands has built a network of sand mines, processing locations and innovative products to support oil and gas development. Today, its network of mines in Arizona, Minnesota, Nebraska, Wisconsin and Saskatchewan has the capacity to produce more than 9 billion pounds of sand annually and currently distributes sand to all of the major basins in the United States and Canada.
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Earlier this month, Preferred Sands announced plans to open an additional Northern White sand plant that will expand its “frac sand” production capacity by more than four billion pounds annually.
Jamison Ely, also a member of KKR’s Special Situations team, pointed out: “The energy industry in North America has undergone immense change and we believe Preferred Sands is poised to benefit from the current positively trending fundamentals. KKR has been a significant participant in this industry transformation having made a number of investments throughout the energy value chain. We have followed Preferred Sands for a long time and we think it is well positioned to capitalize on growing demand for frac sand.”
After the deal with KKR closes Michael O’Neill, the CEO of Preferred Sands, will remain both CEO and the majority shareholder of the company, and KKR gains the right to nominate two directors on the Board of Directors.
Michael O’Neill said of the deal, ”This is a long-term plan that enables us to further grow our industry-leading platform of products and services, ” adding, “We deeply appreciate that KKR worked with us in an expedited time frame to create a tailored solution to meet our immediate needs, with the flexibility to focus on our future growth plans and other opportunities.”
Rescuing a company before it goes bust is much preferable to, and more constructive than, the, sometimes more common, vulture funding approach once a business has already fallen into bankruptcy and KKR is to be commended for the approach its Special Situations team is taking here. The transaction, which is subject to customary closing conditions, is expected to close on July 31, 2014.
As a global investment firm with close to US$100 billion in assets KKR manages investments across multiple asset classes including private equity, energy, infrastructure, real estate, credit and hedge funds. The company hopes to generate attractive investment returns by following a patient and disciplined investment approach, employing world-class people, and driving growth and value creation at the asset level.
KKR invests its own capital directly as well, alongside its partners’ capital and also brings opportunities to others through its capital markets business.
